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Direct vs. indirect rollover

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I am trying to rollover from my existing IRA to my Solo 401k. The IRA custodian is saying that this can be processed as an indirect rollover, which is allowed once a year. Is this the correct way to proceed?

A rollover can be processed as an indirect rollover or a direct rollover.

  • Indirect rollovers are reported as taxable events
  • Direct rollovers are reported as non-taxable events
  • Direct rollovers are strongly recommended. It is your responsibility to ensure that the custodian processes your request as a direct rollover.
  • The custodian processing the rollover will issue a 1099-R, reporting the rollover as taxable or non-taxable
  • Indirect rollovers will require additional filing and reporting from you

Indirect rollover

  • In an indirect rollover, the custodian processes the funds as a personal distribution, which is a taxable event
  • You receive the distribution
  • You must then roll the funds over to another retirement plan within 60 days to avoid taxation and penalties
  • You must also report to the IRS that the funds were rolled over to another retirement plan, i.e. the Solo 401k

401ks do not have a form to report the receipt of rollover funds, like Form 5498. Form 5498 is for reporting the receipt of rollover funds into an IRA only; it is not applicable for a 401k.

A 1099-R issued by the custodian would show the following, if processed as a personal distribution:

  • Box 1: Rollover amount
  • Box 2.a: Anything other than “0.00”
  • Box 7: Anything other than “G”

If the 1099-R was issued as above, you will need to correct/report/show that the funds were received into your Solo 401k, instead of being kept by you as a personal distribution:

  • Contact the custodian and request that they reissue a corrected Form 1099-R
  • Request help from your CPA

Let your CPA know that the funds were moved into your 401k, and give them the 1099-R to review. Your CPA may be able to offset that amount on your tax return by indicating that the funds were deposited into a qualified plan.

In this case, the IRS will likely contact you asking you for proof that the funds were rolled over into your 401k, which can include a 401k account bank statement showing the deposit of funds, your plan documents with the IRS Opinion letter, and a letter of explanation.

Direct rollover

  • In a direct rollover, the custodian processes the funds as going from one retirement plan to another, e.g. from the IRA to the Solo 401k
  • The direct rollover check should be made out to the 401k and sent to your address
  • You then deposit the direct rollover check into the 401k account

A 1099-R issued by the custodian would show the following, if processed as a direct rollover:

  • Box 1: Rollover amount
  • Box 2.a: Should be “0.00”
  • Box 7: Should be “G”

Direct rollovers are best for Solo 401ks.  Our instructions explain how to initiate a direct rollover into your Solo 401k. 

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